Canada’s pension plans could give Latin American infrastructure a much-needed lift
May 9, 2017 |
As infrastructure developers in Latin America look at more sources for long-term financing, Canada’s big pension plans could step in when banks are not willing to lend
Canada’s pension plans have invested in Latin America infrastructure assets for years. In the past decade or so, equity has been their preferred form of investment, taking stakes directly and indirectly in water utilities in Chile, renewable energy projects in Brazil and Mexico and toll roads in Chile, Costa Rica and Mexico, to name a few. But they have remained mostly idle on the debt side, preferring to put their money to work where they can better measure returns, based on years of operating results.
That looks set to change. Canada’s largest public pension plans are expected to provide increasing amounts of debt financing for public-private partnerships (PPPs) in Latin America’s infrastructure sector, with government guarantees ensuring more predictable returns.
Infrastructure firms typically look to borrow money at the start of a project, to finance construction. Investors that back a project with debt at that point run the risk of construction being delayed or halted entirely, jeopardizing returns. Equity stakes in firms or vehicles with an operating history offer greater certainty.
“If you look around, there are a lot infrastructure projects in Peru, Colombia and Argentina. There are 15 to 20 PPPs that are going to need long-term financing, but most international banks lately find it challenging to go beyond seven or 10 years,” one banker says. “The pension funds are the best equipped to do this. They have long-term money and they’re going to look at infrastructure.”
The big four — Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers' Pension Plan (OTPP) and PSP Investments — have more than $700 billion in assets under management. Adding other pension funds with active infrastructure investments, such as British Columbia Investment Management Corporation (bcIMC), Ontario Municipal Employees Retirement System (OMERS) and Alberta Investment Management Corporation (AIMCo), the total assets under management approach $1 trillion.
Even a small percentage of that pool of assets represents a chunky allocation for Latin American infrastructure.
Canadian pension plans are not likely to abandon the steady philosophy that has guided their investments up to now. Unlike fellow Canadian investor Brookfield, which likes to buy assets when others stay well away, the pension funds prize certainty and predictability over above-average returns.
“They’re smart money,” the banker says of the North American pension plans, not just the Canadians. “They’re not just going to move very quickly into something.”
But little by little, they are shifting focus.
Rashad Kaldany, who directs CDPQ’s investment strategy in emerging markets, says the pension plan is gradually investing in infrastructure debt.
Most of CDPQ's Latin American infrastructure investments are in equity. It has made an aggressive play in Mexican infrastructure through equity investments, for example, taking a 51% stake in a trust that it formed with local institutional peers in 2015. CDPQ has invested 17.9 billion pesos ($900m) in the vehicle. It has also made a 3 billion peso direct investment in a toll-road joint venture with local construction firm ICA.
But recently, CDPQ has started to buy sovereign and sub-sovereign bonds. The pension fund is still a year or two away from buying corporate bonds or providing loans, though: “It’s a gradual transition,” Kaldany told LatinFinance at an infrastructure forum hosted by the Inter-American Development Bank (IDB) in April.
That transition could be about to take a big step forward. The Quebec City-based pension fund was looking to join commercial banks Banco de Crédito del Perú (BCP), ING and Santander in a 14-year, $250-million syndicated loan led by Brazil’s Itaú BBA for the Pacífico 2 toll road concession in Colombia, market sources told LatinFinance in February. Local lenders Banco de Bogotá and Davivienda previously put up 400 billion Colombian pesos ($139 million) in local-currency financing for the toll road.
Kaldany declined to comment on the possible loan in Colombia, or on direct debt financing for PPPs and concessions in Latin America on the whole. He did, however, tell a panel at the IDB event that CDPQ does not even look at transactions where it cannot put hundreds of millions of dollars.
Bank capital tightens
Canadian pension funds' increased attention on financing Latin American infrastructure comes at an important time. New banking regulations like the Basel III accord have pushed up the cost of capital for commercial lenders. As a result, banks have been forced to reconsider long-term loans for infrastructure, turning instead to mini-perms that can be taken out in the bond market, says Gema Sacristán, the chief investment officer of the Inter-American Investment Corporation (IIC), which is part of the IDB Group.
That opens the door to other investors — such as pension funds. Indeed, some in the market expect US and European pension funds, including the Dutch and Norwegians, to also pick up their participation in infrastructure in Latin America
Sacristán sees three pockets of financing that can fulfill the need for long-term financing: institutional investors, local and international debt funds, and high net worth individuals. “The Canadians are very interested, and we’re working with them,” she says of institutional investors. “What are the Europeans doing? Not too much. US investors are doing a bit more.”
Tried and true
Institutional investors, such as pension funds, investment managers and insurance companies, have the potential to supply much-needed financing, concluded a report by the IDB and consulting firm Mercer. But these investors have trouble assessing the commercial viability of infrastructure projects in emerging markets.
That means that while infrastructure project debt may be a growth area for Canada's pension fund investors, they are expected to keep up their direct equity investments, also.
“There are plenty of opportunities to invest in existing assets and reap the benefits,” says Alejandro Olivo, an analyst at Moody's, adding that he expects the funds to continue their M&A strategies in Latin American infrastructure.
Bribery scandals have tarred many M&A opportunities in infrastructure, especially in Brazil. But Canada’s pension plans have steered clear of projects with reputational risks and they are likely to maintain the same discipline, despite the allure of higher returns, Olivo says.
“We still see a number of private participants that are willing to invest [in the distressed assets],” he says.
Such discipline, however, will not leave the Canadian pension plans out of the M&A market. They understand what the different markets need in terms of infrastructure investments and they cultivate fruitful relationships with local partners, Olivo says.
“When you look at their equity investments in the region, they continue to grow at impressive rates, especially in the current environment, when strong domestic players are fewer and fewer,” he says.
Even CDPQ’s seemingly novel approach to debt financing is not as risky as it appears. Colombia’s 4G toll road concessions program involves availability payments from the government called vigencias futuras, which guarantee a minimum level of revenues, regardless of whether a toll road meets its traffic projections or not.
Not all Canadian pension investors are interested in shifting their investment strategies in Latin American infrastructure. One that has its sights firmly set on equity stakes is OPTrust, which manages assets from the OPSEU Pension Plan. The fund, which trails the big four with a mere $19 billion of assets under management, prefers to find reliable partners in the local markets, rather than go it alone, Hugh O’Reilly, its chief executive, says.
“We write checks in the $100-million range. We operate in a different context than some of our larger peers. We rely on partners,” he tells LatinFinance.
OPTrust holds a stake in the Spanish infrastructure concessions company Globalvia, which operates toll roads in Mexico, Chile and Costa Rica. Globalvia’s other shareholders are the Dutch pension fund PGGM and the Universities Superannuation Scheme (USS) from the United Kingdom.
“Our model is direct investing, and we view Globalvia as a direct investment,” O’Reilly says. “We take the mistakes from developed markets and learn from them for developing markets.”
As O’Reilly puts it, OPTrust is “not in a race to get money out the door” but it wants to be “proactive” and not get bogged down by examining all the pitfalls in the market, such as the Odebrecht scandal. “Making a judgement on an entire region based on one company is not a good way to go about business,” he says. “Bad things happen.” LF